Learn how to calculate revenue growth rate and measure the success of your business.
Calculating revenue growth for your company is actually a relatively simple process, something that can be done automatically using a simple spreadsheet that is updated at regular intervals.
However, the value that is the result of this simple calculation hides a number of factors that actually go into changes in your company's revenue from period to period. Although determining revenue growth is straightforward, understanding and analyzing the factors that go into how the revenue changes is more complex and nuanced.
By applying the result of the revenue growth formula as a metric to evaluate how internal and external factors affect your company's revenue, it is possible to see what has the biggest effect, and based on those factors you can control, a revenue growth strategy can be developed and implemented.
Continuous monitoring of your revenue growth rates will show you whether your strategy is effective and whether changes to various factors have the intended impact.
In the following article, we provide an introduction to calculating the revenue growth rate for your company. Then, we explore how to use that calculated value to understand and analyze the impact of various factors as you work to develop a marketing strategy or other plan to improve sales and drive growth in an effort to improve your company's revenue growth rate.
What is revenue growth?
In simple terms, revenue growth is your company's revenue over a certain period of time (such as a quarter or year) compared to the same period of time in the past.
Note that the revenue is what is being measured, not the profit, so expenses are not included.
Additionally, revenue can come from a number of sources, including sales, royalties, and investments. The fact that the money coming into your company from all sources is what is being used to measure revenue growth is what makes analyzing and understanding the rate to develop a good revenue growth rate strategy so nuanced.
Evaluating your company's revenue growth over different periods of time allows you to see how your revenue changes over those periods.
For example, your quarterly revenue can be evaluated over a single year to see how changes made throughout the year affect revenue. Looking at differences in individual quarterly revenue from year to year can show you how changes made in one quarter affected revenue a year later.
Choosing the period of time that you want to look at and the time period over which you want to evaluate changes (how many individual periods you will calculate to be able to observe trends) are important things to consider as you develop and evaluate a revenue growth strategy, including making changes over time as additional historical data points are added.
Over time, as your company priorities shift, you will want to understand what is most effective at steering the factors that affect your revenue growth management.
Measuring the revenue growth over longer periods of time, shifting from quarterly to annually to every five years, etc., will help you identify historical trends in your revenue growth and in the factors affecting your revenue.
But even with a small number of data points, you can begin to see what changes have an impact and develop an effective plan for improving your consistent revenue growth.
What is the revenue growth formula?
Your company's revenue growth rate is calculated using the revenue numbers for two periods of time.
So, for example, if the Q1 revenue in 2022 was $500,000 and in Q1 of 2021 the revenue was $450,000, the revenue growth would be that $50,000 difference between the two.
Since the calculation compares the revenue in two periods, if the revenue in the current period is lower than that in the previous period's revenue, your revenue growth will end up being negative. Although you are not going to want to see a negative revenue growth rate, if that does happen, taking a closer look at what changed between the two periods will be important.
The specific calculation of the revenue growth rate will result in a percentage of period-over-period growth. The formula for calculating this revenue growth rate is:
Using the same numbers from above, the revenue growth from Q1 2021 to Q1 2022 would be calculated as follows:
[(500,000 - 450,000) / 450,000] x 100% = [50,000 / 450,000] x 100% = 11.1%
But where did that additional 11% of revenue come from? Did sales increase? Did some previous investments pay off more in 2022 than they did in 2021? Was your social media presence more effective?
These are the types of questions that you will need to explore and try to answer if you want to apply the revenue growth formula to the development of effective revenue growth strategies.
Analyze and interpret revenue growth
Although calculating the period-over-period revenue growth is straightforward, it is only the first step. Figuring out what is driving that revenue growth is key to unlocking the ability to make changes within your company to keep it growing.
Since you are evaluating your revenue growth between two periods, the overall benefit of this metric is to develop a historical perspective of how your company's revenue has been changing over time.
By comparing those changes in revenue with records of changes within your company, you can begin to decipher those things that are contributing to the revenue growth.
If you are just getting started with tracking your revenue growth, you can start tracking various factors at the same time to see which factors have the biggest impact on changes in revenue.
The simplicity of calculating the revenue growth rate makes it an important starting point for developing things like a marketing strategy, sales targets, or hiring plan.
Different factors that affect revenue growth
As mentioned earlier, there are a number of things that have the potential to affect your revenue growth.
Understanding what these factors are is only the first step to using them to monitor your revenue growth and evaluate their individual or combined effect on your growth strategy.
Factors affecting revenue growth can be internal or external, and it is important to determine those factors that are specific to your company and its present situation which are applicable to your revenue growth.
Internal factors
In general terms, internal factors that have an effect on revenue growth are those that a company has control over. Examples include increasing production, creating new products, and entering a new market.
The effect that these factors have on your company's revenue growth rate can be determined by carefully tracking the changes that you make period over period. To help simplify things, keeping the number of simultaneous changes to a minimum will help you in determining those changes that had the largest positive (or negative) impact.
An example of using the revenue growth rate to evaluate the effect of a change is your company's marketing strategy.
You may have developed this strategy when your company was just getting started, and as your company has grown, as seen by the revenue growth from increased sales, you will want to adjust your marketing strategy based on the internal factors that most affected your revenue growth from the time the strategy was first implemented until the present.
Then, moving forward with the updated strategy, you can begin a new process of evaluating the factors impacting your revenue growth under the new marketing plan.
External factors
Contrary to internal factors, external factors are those that are outside your company's control. Things like your competitors, changes in technology, the overall economy, and the political climate are all things that can certainly affect changes in your company's revenue, but there is nothing that you can do to explicitly change their effect.
Although you cannot control external factors, identifying them and understanding the impact they will have on your company as you seek to drive sales and increase revenue growth is important.
For example, as you track your revenue over a period of years, you may note a trend that follows large shifts in how your customers use technology.
Using this information, you can monitor general shifts in technology use and make predictions about how those changes will affect your revenue in the future.
Because you cannot explicitly change how your customers will use technology, the impact of technological factors may not be as easy to predict as the impact of your internal company changes.
However, as you gather additional data over more time periods, you can refine how you make your predictions regarding the impact of external factors on your revenue growth rate.
Update your marketing strategy to improve revenue growth
As you can see, it may be easy to determine the period-over-period revenue growth for your company, but figuring out how to improve that growth is more of a challenge.
One of the easiest ways to improve your revenue growth is to make changes to your marketing strategy. This is because your company's marketing strategy can be shaped to apply to many of the internal factors driving changes in your revenue growth rate, and can even consider external factors and how they might impact your revenue.
As you evaluate what does and does not work to reach your target revenue growth rate, note those factors that deal directly with how you approach your customers. You may note that your marketing strategy could use some updating to encompass those factors within your control.
If that is the case, determining which changes to make and making them as soon as possible will help your company realize improved revenue growth sooner.
